THE New Zealand Herald AND DAILY SOUTHERN CROSS. MONDAY, FEBRUARY 22, 1932. FACING REALITIES.

New Zealand Herald, Volume LXIX, Issue 21113, 22 February 1932, Page 8

THE New Zealand Herald AND DAILY SOUTHERN CROSS. MONDAY, FEBRUARY 22, 1932. FACING REALITIES.

When Parliament meets this week several financial questions much canvassed throughout the country can be expected confidently to appear for early discussion. The demand for "freedom of exchange" is a certainty, and it is very probable that the less emphasised suggestion of a compulsory reduction in interest rates will also emerge. It. is very desirable, therefore, that the realities of the financial position, bearing on these and other urgent questions, should be recognised and faced. To consider first the exchange position, the common demand is that the compulsory pool the Government has instituted should be abolished, the theory being that if is used to peg the rates artificially, to prevent a certain rise which would add a bonus to the proceeds from exported produce. A reasoned answer to such contentions is given by the chairman of the Associated Banks, who, if he says nothing very new, marshals with admirable brevity and clearness the arguments against the campaign for free exchange, or to proceed from its name to its real purpose, for higher rates of exchange. Mr. Grose shows that the pool was not established to fix the rates, but to enable the banks to come to the rescue of the Government, as it had appealed to them to do, in meeting its overseas obligations. He presents the banker's case for exchange rates at their existent level—and what case is there, other than the banker's? The trading position, according to the figures he quotes, does not warrant a higher rate, and it must be the only real criterion. Another important factor can be cited, in addition to what Mr. Grose has said. The Government proposes to liquidate the \\hole of the London reserve fund. The £2,000,000 from this source is a further assurance that there will be no shortage of London funds justifying a rise in exchangerates.

From the point of view of State finance, the country has reason to be very*thankful for the assurance that exchange rates need not rise and should not rise. For the Government has problems of grave importance without the burden being increased J\V inflated exchange. Three are outstanding. First comes the floating debt. The Treasury bill liability in London has been discussed as though it were only a factor in the exchange problem. Its real significance is that the Government has to find in New Zealand £4,000,000 plus the cost of exchange, to meet that liability. In discussion of the added amount a higher exchange would involve, it is as well not to forget that the principal sum must somehow be provided. It is one of the major problems of the year. Again, with outside sources of loan money dried up, the Government has to raise, in New Zealand, funds to finance public works. What the requirements will be nobody knows. Parliament voted over £6.000,000 for this purpose last year, and to get through on less than £2,000,000 this year the country will need to be extremely fortunate. A third cause for anxiety is that provision will have to be made to cover losses of capital in the State Advances Department. These must be counted as inevitable if the provisions of the Mortgagors Relief Act are' applied at all extensively to Government loans. The pleasant fiction that State Advances debt need not bo counted as part of the public debt can no longer be sustained. for its prospect of being selfsupporting has disappeared. Thus its position supplies the third factor demanding that delusions be dropped, and the realities of the financial situation faced.

In this light of realism the proposal for a compulsory reduction of interest can be examined. The Government has to borrow from somebody, from some source in New Zealand, £5,000,000 or £6,000,000 at least, an,d probably more. On what terms is it going to do that if it proclaims, by using its legislative powers to scale interest down, that Government loans are not a safe investment? The truth can be learned from the experience of Australia, where no Government bond can be issued now, where no Government ventures to issue a Joan, where all are leaning on the banks for support. The New Zealand Government is at present asking holders of maturing loans in the country to renew in 5 per cent, stock with a currency of nearly six years. How can it repudiate that contract. In the next financial year the Government will require new loan money to the extent of £5,000,000 or £6,000,000 and must meet a maturing debt of over £5,000,000. Looking a little further ahead, in the following year some £17,000,000 of debt held in New Zealand has to be met. It is not merely a question of maintaining the Dominion's credit abroad ; there is the very vital question of maintaining the credit of the Government in New Zealand. The last way it can do that is by varying its contracts in its own favour. This is no time for compromising with principles. The only course that will point a way from present complexities and problems is that of facing realities and meeting obligations. The Government and the country should give heed to a statement by Mr. .T. M. Keynes, who is not always regarded as orthodox in his attitude to these questions. He has said :"A forced reduction of the rate of interest on the public debt is truly named repudiation, and repudiation of the national debt is a departure from financial virtue so extreme and so dangerous as not to be undertaken but in the last emergency." New Zealand, beset with problems and difficulties, is far from having reached the. last emergency. She need never do so if unsound theories are discarded, breaches of principle renounced, if obligations are met, contracts honoured, and the whole situation handled in the cold but clear light of reality.